Answer

1. F

   Facts

   When an assessment adds income, the officer usually starts penalty proceedings for under-reporting. The Sec 274 notice gives you a chance to explain why penalty should not be levied. No penalty has been levied yet at this stage.

2. P

   Provisions and law

   • Sec 270A (now Sec 439)Penalty of 50% of tax on under-reported income, or 200% where under-reporting is due to misreporting
   • Sec 274 (now Sec 471)No penalty without giving the person a reasonable opportunity of being heard
3. A

   Analysis

   Penalty is a percentage of the tax on the under-reported income, not of the income itself. If ₹4,00,000 was added and the tax on it is ₹1,24,800 at 30% plus cess, under-reporting penalty would be 50%, about ₹62,400. If the officer says it is misreporting, it can be 200%, about ₹2,49,600. Your options are to reply on merits, seek immunity, or ask that penalty wait for your appeal.

4. C

   Conclusion

   1. 1Read the notice to see whether it charges under-reporting or misreporting
   2. 2Compute the possible penalty on the tax effect of each addition
   3. 3Decide between immunity, appeal and reply on merits
   4. 4Reply before the date in the notice

General guidance from TaxSavvy’s library of money processes. Laws change; your Savvy confirms the answer on your exact case before anything is filed.